Japan's First-Quarter Capital Spending Rises to a Record High

Japanese firms' capital spending in January-March rose slightly more than expected from a year earlier to a record high, a sign that corporate-sector strength continues to underpin a steady economic recovery.

The survey by the Ministry of Finance also suggests that gross domestic product (GDP) figures for the same quarter will be revised up when the numbers are released on June 11.

The data also underscored market expectations that the Bank of Japan will raise rates around August to keep on top of inflation.

Spending on plant and equipment rose 13.6% in January-March from the same quarter last year to a record high of 17.7287 trillion yen ($145.2 million), the survey showed on Monday.

The rise in capex was above market forecasts of a 9.6% increase. It grew 16.8% in October-December. "The data confirms underlying strength in capital expenditures," said Takehiro Sato, economist at Morgan Stanley.

As the data backed up market expectations that the Bank of Japan is on track to raise interest rates, most likely in August, the benchmark 10-year Japanese government bond yield rose to a seven-month high of 1.800%.

Economists said after the data that Japan's GDP growth for the first quarter of this year could be revised up from the initial reading of a 0.6% rise.

It was the ninth straight quarter of expansion but slower than the previous quarter's 1.2% rise.

The slowdown in growth was largely due to a 0.9% fall in capital spending.

"The stronger-than-expected reading could mean the capital investment component of gross domestic product is revised up to flat from the preliminary reading of minus 0.9%," said Takehiro Sato, economist at Morgan Stanley.

But many economists also said they need to watch Friday's machinery orders data, a key leading indicator on capital spending, for the overall outlook.

Surprisingly weak machinery orders data last month raised worries that corporate spending may be losing momentum after experiencing strong growth in the past few years.

Japan is currently experiencing its longest period of expansion in the postwar era, although the rate of growth has been much slower than in past booms.

The MOF's latest survey also showed Japanese companies' recurring profits in January-March rose 7.4% from the same quarter a year earlier to 16.67 trillion yen ($136.6 billion), also a record high. The profit growth compared with an 8.3% increase logged in October-December.

Their sales rose 6.3%, compared with a 7.0% year-on-year rise the previous quarter. The survey was based on responses from 19,077 companies.

Corporate sector strength has been the main river of Japan's economic growth. The central bank has said it will need to gradually raise interest rates from current low levels in line with the steady recovery in the economy.

The BOJ has kept monetary policy on hold since raising the key interest rate to a decade-high 0.5% in February, which was the first rate hike since July last year.

Surprisingly strong figures on jobs and household spending released last week reinforced the view that the central bank could raise rates as early as in the July-September quarter.